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The policy reaction function of the Ecb: an ordered-probit model
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Based on Ordered-Probit models, I estimate the monetary policy reaction function of the European Central Bank between 2001 and 2019. Results show that the ECB does display a forward-looking behaviour. Inflation and output growth projections play a significant role in their monetary policy decisions. Moreover, yield spreads across euro area countries do not seem to be significant on their decision. Therefore, the possibility of a secondary mandate related to financial markets’ stability is not confirmed, according to my results. Lastly, marginal effects on the ordered probit regressions, show that forecasts on output growth have the largest weight on monetary policy decisions.
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Ordered-probit model Monetary policy reaction function Staff projections Yield